Halister News

(Bloomberg) -- Analysts favor maintaining carry trades in European rates markets, given the prospect of reduced volatility over the summer months. Below is a compilation of some of the most recent views and recommendations from strategists. BofAML (strategists including Sphia Salim)

• Peak carry and roll is in the 5y for Italy and the 7y for Spain and Portugal; however, when adjusting for volatility, the 2-3y in Italy stands out, in addition to 7y Portugal
• Richening of payer skews provides attractive opportunity to enter payer ladders; find that it is in 2y tails that the richening of payers has been most significant, for short expiries, and in the 5-7y tails for longer ones 
• Recommend buying EUR 100m ATM/ATM+25/ATM+50bp 2y5y ladder, receiving EUR 200K (mid), 3M carry is about EUR 105K, with a breakeven level of about 1.62%, not reached since March 2012 and 135bps above spot 5s; target EUR 400K with a stop loss at EUR 200K
  • Risk to the trade is a sharp selloff resulting in higher vol and an even richer payer skew; In 1y2y, we see more value in buying OTM receivers, as we remain bullish the front-end

Nomura (strategists including Renuka Fernandez)

• Maintain long-carry position in EUR 6m2y receivers, entered June 22; however, still believe that an ECB taper is inevitable; partially hedge receivers, by going paid on May Eonia contracts at current levels (-34bps), in half the size of the receiver swaption trade
  • Trade carries negatively, but only very slightly –- just under 0.5bp per quarter -- making it a relatively cheap way to position for a return in the sequencing debate, and net the two positions remain long carry
• Maintain short 10y bunds, expect no sustained break below 50bps, target 65bps; see risks of it range-trading in the near term, believe there is little scope for a sustained break below 50bps

SocGen (strategists including Ciaran O’Hagan)

• Recommend receiving EUR 5s10s30s hedged by longs in 1m10y straddle; receiving fly remains best choice from the point of view of carry and rolldown to volatility ratio, while EUR short expiry swaption vols are back to historical lows, making buying straddles attractive once again, given no link between implied vol levels and absolute moves in underlying rate
  • Buy-and-hold trades in EUR straddles allow investors diversify and can be a hedge for carry positive trades
• Hold long in 5Y BTP versus bund at 104.5bp, expect little volatility in August and take advantage of a generous 9bp/3m carry and rolldown
  • Still value in rich BTPs, seasonality supports stable bund spreads, and maybe even some further tightening over August, will look to reset longs in September
• Recommend fading recent discrepancy in 2s5s OAT versus bund; weak inflation and encouraging economic growth support tighter sovereign spreads in medium term
  • We see supportive seasonal factors in July-August, which support carry trades and some hunt for yield in higher-yielding credits

Barclays (strategists including Cagdas Aksu)

• EGB spreads are priced at the more optimistic end of the valuation scale, given a variety potential risks on the horizon; remain neutral on duration, having closed most bearish trades over the past few weeks
• Recommend short 10y Italy vs Germany (short BTPS 1.25% Dec. 26 vs DBR 0.25% Feb. 27); despite French and Spanish spreads being relatively tighter vs Italy, a reassessment of EGB spread risk premium will likely result in Italian spreads reacting at a higher beta given the greater political and economic risk premium
• Continue to recommend holding on to long 10s/30s ASW box in Spain; credit term structure is far too steep in Spain and the trade can work both in bullish and bearish spread environments

--With assistance from Tanvir Sandhu. To contact the reporter on this story: Abigail Morris in London at amorris93@bloomberg.net To contact the editors responsible for this story: Ven Ram at vram1@bloomberg.net Anil Varma